Puget Energy buyout rejection recommended

Staff at two state agencies recommend buyout rejection

By BILL VIRGIN, P-I REPORTER

Updated 10:00 pm, Wednesday, June 18, 2008

Saying there's nothing in it for customers, both the Attorney General's Public Counsel office and the Utilities and Transportation Commission staff recommended Wednesday that state regulators reject the proposed buyout of Bellevue-based Puget Energy Inc. by an Australian-Canadian consortium.

In testimony filed with the UTC, both staff and the Public Counsel office said they're particularly concerned that the deal would load up the electric and natural gas utility with too much debt.

"Puget's shareholders, Puget's executive officers and the investor consortium will realize significant financial gains while Puget's ratepayers receive no direct benefit and must shoulder the additional financial risk caused by the transaction debt," said Stephen Hill, a financial consultant who testifies in utility cases, representing the Public Counsel office.

"It's not in the public interest," added Mike Parvinen, acting director of the UTC's energy section. "There's a significant amount of risk associated with the merger. Staff could not identify enough mitigating factors or benefits to customers that would offset those risks."

With the public already having expressed considerable opposition to the merger at three public hearings and through written comments, attention now turns to the three-member commission, which begins formal hearings July 28. While Puget has said it wants a decision by early September, UTC spokeswoman Marilyn Meehan said there's no specific deadline by which the commission has to render a decision.

"Now that everyone has their cards on the table, we are hopeful we will be able to address their concerns and move forward on getting the merger approved to give Puget Sound Energy the access to capital we need to carry on our business plans to serve our growing customers in this vibrant region," the company said in a statement. "There have been two previous mergers approved in Washington that have gone through the same process with intervenors submitting testimony: Cascade Natural Gas and PacifiCorp. We hope to join them."

The UTC is considering the merger as it also reviews Puget's application for a rate increase for its electricity and natural gas customers. Hearings on that case start Aug. 25. Parvinen said staff, the Public Counsel office, other parties in the case and the utility will meet in early July to discuss possible settlement of both the merger and the rate cases.

Puget Energy announced in October that it had agreed to be purchased by a group led by Australian investment banking firm Macquarie Group, and including three Canadian pension plans, for $30 a share.

What concerns many about the deal is how it's to be financed. Hill, who called the deal a leveraged buyout, said Puget will add $1.6 billion of debt to its existing $2.6 billion. On top of that Puget will have to borrow even more for infrastructure projects for its electricity and gas businesses.

Hill said the commission's approval of the plan would constitute "a march backward for Puget and its customers to a level of financial risk from which Puget, through much effort, has only recently emerged." He noted bond ratings agencies have already reduced their grades on Puget's debt out of concern about the balance-sheet impact, and said projected cash flows might not provide sufficient margins for financial safety.

Puget contends it needs to do the deal because it faces huge capital needs to accommodate customer growth and provide new energy sources. Affiliating with Macquarie will give it access to capital, the company says.

But Simon ffitch, director of the Public Counsel office, said Puget hasn't demonstrated that it would be able to get capital any cheaper through the Macquarie-led transaction. While not contesting that Puget needs capital, "That doesn't mean you've got only one place to go to get it."

Hill's testimony also suggested the deal is motivated in part by the returns to participants. "As a result of the proposed transaction, the officers of Puget realize large payments, the stockholders of Puget get a 25 percent increase in the value of their stock, Macquarie collects its management fees and there are cost savings expected with regard to taxes and operating costs. Customers, on the other hand, receive no such benefits. They receive only the increased risks that obtain from the use of more debt leverage."

In answer to testimony from Puget Chief Executive Steve Reynolds, Hill said, "Mr. Reynolds' concern for Puget's capital expenditure program as well as his support for all aspects of the proposed transaction must be evaluated in light of the fact that he will receive payments totaling more than $20 million if this transaction is approved."

The Public Counsel office also said commitments by Macquarie and PSE on such items as service quality and environmental performance are merely a continuation of obligations under which the utility already operates.